PSI Ohio Insurance Practice Exam

Which characteristic of an insurance contract states that the insured should be restored to their financial condition after a loss?

1. Contract of Adhesion

2. Contract of Indemnity

3. Contractual Obligation

4. Contract of Guarantee

The correct answer is: Contract of Indemnity

The characteristic of an insurance contract that indicates the insured should be restored to their financial condition after a loss is known as the concept of indemnity. This principle means that the purpose of insurance is to compensate the insured for their loss, thereby preventing them from profiting from the situation. Instead, the goal is to return them to the financial position they occupied before the loss occurred. Indemnity is crucial in insurance because it ensures that the payout does not exceed the actual loss suffered, which helps maintain balance and fairness in the insurance market. This principle supports the idea that all parties in the insurance agreement should act in good faith, promoting ethical behavior and trust among insurers and policyholders. In contrast, a contract of adhesion refers to a contract where one party has significantly more power than the other in drafting the terms, typically seen in insurance policies where the insurer sets the terms. Contractual obligation relates to the duties that the parties have under the contract, while a contract of guarantee involves one party agreeing to cover the debt or obligation of another if that party defaults. None of these concepts encapsulate the restoration of financial condition like the principle of indemnity does.